March 12 (Bloomberg) -- Leaders of the U.S. Senate Banking
Committee announced long-awaited plans to dismantle Fannie Mae
and Freddie Mac, pushing the companies’ common shares to their
biggest intraday drop in 10 months.

Fannie Mae shares tumbled as much as 44 percent, paring the
losses to 31 percent to close in New York at $4.03, after Edwin
Groshans, a managing director at Washington-based equity
research firm Height Analytics LLC, described the proposal as
holder-negative. Freddie Mac fell 27 percent to close at $4.04.
Preferred shares also dropped, some by as much as 12 percent.

The bipartisan measure, drafted with input from President
Barack Obama’s administration, would replace the U.S.-owned
mortgage financiers with government bond insurance that would
kick in only after private capital suffered losses of at least
10 percent, Senate Banking Committee Chairman Tim Johnson and
Senator Mike Crapo said in a statement yesterday. The bill would
require most borrowers to make down payments of at least 5
percent.

“This starts the ball rolling to get housing finance
reform done,” Jaret Seiberg, policy analyst at Guggenheim
Securities LLC’s Washington Research Group said in a telephone
interview. “This issue remains alive and kicking and whatever
happens in the next few weeks is going to tell us whether we get
to the finish line or not.”

Mounting Pressure

Crapo and Johnson, a South Dakota Democrat, have been
facing mounting pressure to introduce the legislation with
enough time left to push it through so it could become law this
year. Even with enough time, it is far from certain that the
Senate and the Republican-led House will reach agreement on a
bill and pass it to Obama for approval.

“ This agreement moves us closer to ending the five-year
status quo and beginning the wind down of Fannie and Freddie
while protecting taxpayers with strong private capital, building
the components for a stable secondary market and avoiding
repeating the mistakes of the past,” said Crapo of Idaho, the
panel’s top Republican.

The White House released a statement yesterday calling the
Crapo-Johnson proposal “a workable bipartisan approach to
complete the biggest remaining piece of post-recession financial
reform.”

The senators said they will introduce their bill “in the
coming days” and begin fine-tuning it with other members of the
committee in the coming weeks.

Earlier Bill

The Johnson-Crapo plan is based on a bill introduced last
year by Senators Bob Corker, a Tennessee Republican, and Mark
Warner, a Virginia Democrat. The new measure would set specific
benchmarks for transitioning from Fannie Mae and Freddie Mac to
the revised system, ensuring that the companies would withdraw
only after the replacement was functioning.

The government would play a smaller role in the market by
taking a backstop position on mortgage securities, stepping in
only if private interests were wiped out by catastrophic losses.
A new agency called the Federal Mortgage Insurance Corp. would
charge fees to issue a government guarantee on bonds that would
kick in only after private investors suffered losses of at least
10 percent.

The bill would establish funds for affordable housing that
would be paid for by a fee on users of the new government
reinsurance agency.

To increase access for community banks, the measure would
establish a mutual cooperative jointly owned by small lenders to
provide a cash window for eligible loans while allowing the
firms to retain servicing rights.

Senate Resistance

Johnson and Crapo have to navigate Democratic politics on
the banking panel, which must give preliminary approval to the
measure. Senate Democrats including Elizabeth Warren of
Massachusetts and Sherrod Brown of Ohio have said they won’t
back a plan unless it guarantees affordable loans for most
buyers and includes significant support for low-income rental
housing.

Without the vote of a majority of the 12 Democrats on the
panel, the measure will have trouble gaining wider support from
the full Democrat-led Senate.

In the House, a bill that would almost entirely privatize
the mortgage market, written by Financial Services Committee
Chairman Jeb Hensarling of Texas, hasn’t gained enough support
for a vote of the full chamber. It is unclear whether the House
would act this year even if the Senate passes a bill.

Seiberg, the policy analyst, said the House could be
pressed to act if the Senate moves forward.

‘Middle Ground’

“If it comes off the floor with a lot of support, the
pressure’s going to be on the House to find a middle ground and
actually get something done,” he said.

Johnson and Crapo didn’t say how shareholders in
Washington-based Fannie Mae and McLean, Virginia-based Freddie
Mac would be treated as the two companies are wound down. The
companies, bailed out with $187.5 billion from taxpayers after
they neared bankruptcy in 2008, have begun to return billions of
dollars as the housing market rebounds.

Investors including hedge fund Perry Capital and mutual-fund firm Fairholme Capital Management have sued the U.S.
challenging an arrangement in which the Treasury takes all of
the companies’ quarterly profits. Hedge funds have also lobbied
Congress to re-capitalize the companies instead of winding them
down.

“All the sincere effort expended by the Senate Banking
Committee simply confirms that there is no better alternative,”
Fairholme Chief Investment Officer Bruce Berkowitz said in a
statement. “Their core insurance businesses need to be
restructured in a way that compensates and protects the
taxpayer, not thrown away. No legislation is required for this -
– only an end to the conservatorship and the restoration of an
independent regulator who insists they conserve their capital
and operate their business prudently.